What you have to repay on a Division 7A loan

Your repayment schedule

Every year of the loan, with the benchmark rate that applies to that year. Years marked assumed carry the latest published rate forward, because the ATO has not published a rate for them yet.

Total repaid over the term: $138,011.80, of which $38,011.80 is interest.

The rate changes every year, and so does the repayment

This is the single most common error in published Division 7A schedules. Section 109E(6) uses “the current year’s benchmark interest rate” — the repayment is recalculated annually against a new figure, on the balance left at the end of the previous year. Look at what the rate has actually done:

From 4.52% to 8.77% is close to a doubling inside the life of a single seven-year loan. If a schedule shows you the same repayment every year, it was built on one rate and it is understating what you owe.

The rate is the Reserve Bank’s indicator lending rate for bank variable housing loans, owner-occupier, last published before the income year began. Once the year has started the figure is fixed: the ATO confirms it does not change even if the RBA later revises the published rate.

What makes a loan complying

Section 109N keeps a loan from being treated as a dividend in the year it is made, if three things are true before the company’s lodgment day for that year:

• the agreement the loan was made under is in writing
• the interest rate for years after the year the loan is made is at least the benchmark rate
• the term does not exceed the maximum for that kind of loan

There is no prescribed form for the agreement. The ATO’s minimum is that it identifies the parties, sets out the amount, the term, the requirement to repay and the interest rate, and is signed and dated.

The maximum term is 7 years, or 25 years only where both conditions in section 109N(3)(a) hold: the whole loan is secured by a mortgage over real property registered under a State or Territory law, and when the loan is first made the property’s market value, less anything secured ahead of the loan, is at least 110% of the amount. A mortgage by itself does not buy the longer term.

If you fall short, it is the gap that is taxed

Under section 109E(1) and (2), where the amount paid during the year falls short of the minimum yearly repayment, the company is taken to pay a dividend equal to the shortfall. Not the loan balance, and not the whole repayment. It is unfranked, and it goes into your assessable income for that year.

Two provisions can change that figure and neither is modelled here, because both need facts this page does not have. Section 109Y caps the total of a company’s deemed dividends at its distributable surplus, which comes out of the company’s accounts. Section 109Q allows the Commissioner to disregard the dividend where treating the loan that way would cause hardship.

There is also section 109R, which disregards a repayment if the money was re-borrowed from the same company — paying the loan down in June and drawing it back out in July does not count.

How the remaining term is counted

Section 109E(6) defines the remaining term as the loan’s longest term, less the number of years between the end of the income year the loan was made and the end of the year before the one being worked out — rounded up if it is not already a whole number. In practice: the first repayment year uses the full term, and it steps down by one each year after that. A 7-year loan made in the 2026 income year has seven years remaining when its first repayment falls due in 2027.

Where these figures come from

The formula and the tests come from the Act; the rates come from the ATO. One warning worth recording: the ATO’s own page shows the formula as an image whose alternative text is garbled, carrying an extra reciprocal that would give a different answer. This engine is built from the numbered steps the ATO writes out underneath it, and an automated test pins the difference.

The methodology page sets out how this site verifies figures and what it deliberately leaves out.